It’s smelling like roses these days, but technically speaking Apple (NASDAQ:AAPL) is ripe for turning less sweet with investors. Yet, if you’re an agreeable bull hunting for a way to position in AAPL, an out-of-the-money put spread is the (risk-adjusted) move to make. Let me explain.
From its earnings beat to chatter over low-cost Macs and a fresh Apple Watch on the horizon, Apple’s stock has surged 13% in August to reach all-time-highs and cement its place as the world’s first trillion-dollar public company.
Bank of America’s recent upgrade only serves to bolster the case for investing in Apple’s growth.
Tuesday morning analyst Wamsi Mohan raised the firm’s sales forecast on AAPL stock by about $800 million while boosting its price target from an above-market $230 to $250.
Mohan cites confidence in Apple’s increased mobile app diversification (beyond the highly successful gaming segment) and is upbeat about the growth in non-gaming apps such as photo, video and entertainment. Mohan believes these segments will continue to drive Apple’s App Store sales and result in slightly higher margins and Services revenues for AAPL stock.
But on the Apple price chart, the squiggly line suggests AAPL stock is ripe for a technical drop and a bruising for investors taking a bite of the tech giant’s shares today.
AAPL Stock Monthly Chart
It may look like the party is just getting started in Apple stock based on a monthly chart. But Apple’s ever-steepening uptrend triggered by investors’ collective confidence over the past month is technically tenuous at best.
After a near decade-long rally, August’s renewed enthusiasm has put shares outside the upper monthly Bollinger Band and the upper reaches of a Fibonacci resistance zone tied to AAPL stock’s pair of fairly symmetrical corrective cup patterns.
The situation reinforces the fact the price trend in Apple remained friendly for quite a while. All trends eventually come to an end, and AAPL stock looks increasingly ripe for a turn lower. Prepare ahead of time using Apple’s options market.
AAPL Stock: A Bull Put Spread (For Bears)
Not to sound like a broken record, but, in early July, I mistakenly wrote that Apple was in a strong technical environment for dip-buying. Rather than timing the potential correction, I proffered a simple below-the-market put spread. That approach still resonates considering Apple’s current predicament.
With Apple shares at $216.50 in early trade on Tuesday, my favored combination is the Oct $200/$195 put spread for a credit of 50 cents.
The trader keeps the token amount if Apple shares remain above $200 at expiration.
If annualized, the return on this two-month vertical works out to a return approaching 1.50%.
Again, that’ll beat a bank’s CD these days, but it’s hardly anything to get excited over.
This vertical sports a margin of safety near 7.5% relative to buying AAPL stock at today’s price. What’s more, you get the ability to contain losses to $4.50 below $195.
If we’re right about AAPL stock going sour in the days ahead, you can capitalize on the pullback as other investors take a bite out of shares.
Investment accounts under Christopher Tyler’s management do not currently own positions in any securities mentioned in this article. The information offered is based upon Christopher Tyler’s observations and strictly intended for educational purposes only; the use of which is the responsibility of the individual. For additional market insights and related musings, follow Chris on Twitter @Options_CAT and StockTwits.
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